July 20 (Bloomberg) -- Yahoo! Inc., owner of the second-most popular U.S. Internet search engine, reported sales that
missed analysts’ estimates as marketers devoted online search-ad
spending to rival sites. The shares fell in late trading.

Excluding revenue passed on to partner sites, Yahoo had
sales of $1.13 billion, the Sunnyvale, California-based company
said today in a statement. That compares with the average
estimate of $1.16 billion among analysts surveyed by Bloomberg.

Yahoo is grappling with competition from companies such as
Google Inc. and Facebook Inc., which have benefited from
increases in market share and user growth. While Yahoo posted
gains in display advertising, its sales from ads that appear
next to search results dropped in the quarter.

“Their search business is losing share and is in decline,”
said Jason Helfstein, an analyst at Oppenheimer & Co. in New
York, who rates the shares “market perform” and doesn’t own any.
“They’re not cutting enough costs to offset that.”

Yahoo fell 6.2 percent to $14.26 in extended trading, after
rising 10 cents to $15.20 today on the Nasdaq Stock Market. The
shares have dropped 9.4 percent this year.

Search ad sales didn’t meet expectations, Chief Financial
Officer Tim Morse said in a telephone interview. The company
experienced a “pullback” with customers in June, though that has
reversed this month, he said.

“Revenue fell a little bit short for us, so plenty of work
still to do,” Morse said. Currency fluctuations also hurt sales,
he said.

Revenue Forecast

The company joins International Business Machines Corp. and
Texas Instruments Inc. in falling short of analysts’ sales
estimates last quarter.

Yahoo forecast revenue of $1.57 billion to $1.65 billion
for the current quarter, compared with the $1.64 billion
estimate of Aaron Kessler, an analyst at ThinkEquity LLC in San
Francisco.

In the second quarter, search-based ad sales declined 8
percent from a year earlier, after a 14 percent slide in the
January-March period. Display ad revenue, including banner ads,
rose 19 percent in the second quarter.

U.S. online advertising is rebounding. The market should
expand 11 percent this year after declining 3.4 percent last
year, according to EMarketer Inc. in New York. Last week, Google
reported a 24 percent increase in second-quarter profit, which
is derived mostly from online ads.

‘Not Happening’

Yahoo is bringing new content to its site to attract
visitors and keep pace with rivals. The company’s U.S. user base
rose 10 percent in June from a year earlier, a smaller increase
than Google’s 14 percent and Facebook’s 84 percent, according to
ComScore Inc. in Reston, Virginia.

Visitor are also spending less time on the site. They
logged on for 2 hours and 11 minutes in June, down from 2 hours
and 56 minutes in December, according to Nielsen Co. in New
York.

“What they need are people staying up late, spending time
on Yahoo,” said Heath Terry, an analyst at FBR Capital Markets
Corp. in New York, who rates Yahoo shares “underperform.” “From
all the numbers that we see, that’s just not happening.”

Second-quarter net income attributable to Yahoo rose to
$213.3 million, or 15 cents a share, from $141.4 million, or 10
cents, a year earlier.

In May, Yahoo said it would feature social games on its
home page from Zynga Game Network Inc., including “FarmVille”
and “Mafia Wars.” Zynga has more than 235 million active users.

Yahoo also has a deal with Facebook, owner of the world’s
largest social-networking service, to integrate more content on
Yahoo’s sites.

Search Transition

Yahoo is investing in its own properties, using savings
from its efforts to cut expenses. The company is offloading the
costs of running a search engine through a 10-year agreement
with Microsoft Corp. Yahoo will use Microsoft’s Bing search
product on its sites and sell ads next to the results.

The search transition is progressing well and the companies
still aim to have it completed before the holiday shopping
season, Yahoo Chief Executive Officer Carol Bartz said on a
conference call. Yahoo has begun testing the new search
services, both for consumers and advertisers, she said.

The companies aim to use the partnership to compete with
industry leader Google, which had more than triple Yahoo’s U.S.
market share of online searches last month, according to
ComScore. Microsoft was third.

(Yahoo held a conference call at 5 p.m. New York time to
discuss the results. For a replay, go to {LIVE <GO>} and click
on Archived LIVE Events.)